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Sunday, July 31, 2011

Mechanism Design and Why Government Auctions Matter

All roads lead to mechanism design. It is the last topic covered by any advanced microeconomics course here in the US.

The setup is thus: we want to achieve a social goal. Maybe it is the efficient allocation of resources or the equitable distribution of wealth. Whatever it is, we imagine how a most benevolent dictator would do things, and that is the aim we envision.

The problem is almost philosophical. People have different motivations, different goals that compete. These goals are not stated explicitly and people cannot be counted on to care for society's aim as a whole, although some might.

How can we then fashion the rules of the game in such a way that people, diverse as they are, left on their own devices, can move towards the goal we envision. Does such a "rule" exist? If so, what are the possible rules or mechanisms we can implement to drive people towards this goal?

These are the questions I have pondering on for the past few days. We are given problems where we are tasked to find appropriate mechanisms. Quite interestingly, the answer is almost never "let the markets run freely," although it seems outsiders always think that as economists, this should always be our answer. Free markets only work under the assumption that information is perfect, everyone's goals are well known, and there are no externalities. This is not the case. And surely, the world works in a different way.

I think mechanism design can be most clearly explained through the classic problem of who the government should task to build the next tollroad. The government wants to make sure the selected contractor is the best one for the job, that it could build the highway in the least cost with the best materials. But the problem is the government doesn't know what the motivations of each firm is, how efficient their production would be, and how each of them value the project. The government could spend loads just figuring this out. The contract might be given to the wrong firm.

In such a case, we find that an appropriate mechanism is to auction off the contract, like in a first price auction. Auctions work because it can be proven that each firms best strategy would be to submit bids equal to their true valuation. This allows the government to identify the most efficient firm, the one most worthy of the project. It provides the government with most revenue. BUT this only works as long as -- and the proof heavily relies on this --  firms are prevented from colluding and rigging the ballot. This is why the way government procurement is done matters a lot.

My head hurts from studying too much. But at the moment, I'm relishing the realization that there's a load of theory that goes behind such simple things as auctions.

Saturday, July 30, 2011

Send our Boys Abroad

Etheridge, Gier, Younghusband, Schrock, Jonsson. Here are some of the names of the side we fielded to meet Kuwait in the 2nd leg of the Fifa World Cup qualifiers. None sound Filipino. None play their football in our country. Yet I hear no one complaining that they should represent the Philippine team, who have done our nation proud. Why should anyone complain? These five and a couple of others - Greatwich, De Jong, Hinrich, Ott, Burkey - are part of the reason why the Philippine Azkals have been named the 2nd most improved side in the world.

Not that anything about this should strike you as strange. Around the world, you see the same trend. Here's the French football team. Count the number of players that appear French. How many of these players still play in France? I don't think any of them, except the goalkeeper, does.

In 2003, top English football club Arsenal went on a record-breaking unbeaten run of 38 games -- an unbeaten season in the English Premier League, where competition is fiercest. The side was dubbed the "Invincibles." The team was composed of all foreigners, except two.

It's a world of globalized labor we live in and the benefits can be most clearly seen in football. The migration of talent allows tantalizing sides like Barcelona, Manchester United, Real Madrid, and AC Milan to develop. It is this same process that allows Younghusband, Schrock, Etheridge and others to grow into the stars they are for the Philippine side.

There are questions now on how we can make the Philippine side stronger for upcoming competitions. I am surprised no one has suggested this before: I say send the best of our boys to play in clubs abroad. It will do them and our country good.

(Thanks for Corrine Elum, who sent me the list of players)

Monday, July 25, 2011

The SONA in a Word Cloud

As expected, but I'm disappointed there was nothing on the legislative agenda. The problem with reform without legislation backing you up? Everything can be reversed by the next administration.

Saturday, July 23, 2011

Was the Larry Summers Scene on the Social Network True?

In case you've missed it, this interview has made the rounds in the blogosphere lately.
MR. ISAACSON: So was that scene in the social network true?

DR. SUMMERS: I've heard it said that I can be arrogant.

DR. SUMMERS: If that's true, I surely was on that occasion. One of the things you learn as a college president is that if an undergraduate is wearing a tie and jacket on Thursday afternoon at three o'clock, there are two possibilities. One is that they're looking for a job and have an interview; the other is that they are an asshole.

DR. SUMMERS: This was the latter case. Rarely, have I encountered such swagger, and I tried to respond in kind.
The full video is here. Felix Simon provides a short profile and a good summary of the interview here. Summers' view on US macroeconomic policy is worth reading, whether you care about the US or not.

Optimistic Much? Conditional Cash Transfers are Not Enough.

Mahar Mangahas criticizes the latest Philippine Development Plan's "inclusive growth" strategy:
“Inclusive growth” is the current buzzword or fashion statement among those economists and development biz types who insist that macro growth is the key to success, yet grudgingly concede that it hasn’t delivered on promises to uplift the masses... 
The Plan’s other chapters are on “macroeconomic policy,” “competitive industry and services sectors,” “competitive and sustainable agriculture and fisheries sector,” “accelerating infrastructure development,” “towards a resilient and inclusive financial sector,” “good governance and the rule of law,” “social development,” “peace and security,” “conservation, protection and rehabilitation of the environment and natural resources.” With conditional cash transfers, health, and education mentioned only in passing, and undeserving of even a sub-chapter, this Plan isn’t too focused on “inclusive growth. 
I, for one, am willing for the government to focus almost solely on anti-poverty programs, and let growth take care of itself.
I agree that growth is not the only thing. But Mahar Mangahas is too optimistic about these anti-poverty programs. I like the CCT, I really do. In fact before people started raving about it in the Philippines,  I mentioned in my blog that it should be the next "thing." (Sorry for the brag.) But it seems now we are being over optimistic about what these types of programs can achieve. Conditional Cash Transfers is the buzz phrase.

What is the BEST evidence on CCTs so far? The evidence is strong that it increases schooling. Child health and nutrition are also improved. CCTs reduce child labor. It increases consumption. This paper is a good summary of the literature. But how much does it actually reduce income poverty... not many make that very strong claim.

Is it still a program worth doing? Sure. But it's NOT a substitute to growth.

I've said this again and again recently, so pardon the insistence that this is important, but in the Philippines, the unemployment rate for the educated is higher than the uneducated. Getting people to go to school through CCTs is part of the equation, but will it be enough to lift households out of poverty when the transfers end? I doubt it. Without structural change, I just don't see it.

Programs will be programs. They end. The money coming from the World Bank will run dry. Let's move on from gushing about the conditional cash transfer program we are currently implementing. It's insufficient.

Mr. Mangahas ends by saying that the promise laid out by the report of reducing poverty by 10 percentage points in 6 years has never been done. Like the true social scientist that I am, I am skeptical. Never? I may be wrong (and a little bit pilosopo), but what was the rate of reduction during the greatest period of growth in the history of man, the industrial revolution?

***DISCLOSURE: I have not read the full Philippine Development Plan Report***

Wednesday, July 20, 2011

Level-Up By Reading the News

Or should I say, badge-up? Google badges may have been overshadowed by the release of google+ but it's another one of those simple but ingenious ideas coming from my favorite company. Earn badges by reading the news.

The idea is similar to the system used in games like World of Warcraft, a most addicting game, where you level-up your character by accumulating experience points, achieving missions, and doing quests.

Google applies the same incentive structure to reading and hopes that it would increase readership. It's unique; you level-up yourself by reading more. Now imagine if this catches on, and people would read more, get more fun out of this task, with the same intensity that gamers play their RPG games. Public awareness would increase. And perhaps those history teachers would not have such a hard time convincing their students to master their current affairs.

Now if only there was a way to apply the same addicting incentives to work. Imagine what could happen to productivity if workers attacked their tasks with the same gusto as World of Warcraft players to combat their online enemies. That would be the day.

What's the Legislative Agenda, Mr. President?

Forgive me if I join the chorus of those who would predict what would be said in the SONA on Monday. I would like to bet on these. The president will highlight the recent success in government revenue collection and the subsequent upgrading of our country's credit rating to BB+. There will be short mention of the conditional cash transfer program and its progress (although as my friend points out, that was "so last year."). An announcement will be made about the expansion of a community development program, KALAHI-CIDSS, which will allow government units in 21 provinces to fund and create their own local development initiatives. It's unique; it's massive. The US, through its Millenium Challenge Corporation is funding $120M of it.

If any of these turn out to be correct predictions, it's only because the president has shown himself readable in his first year. He is a project-oriented person. In this, he has found success.

The most exciting part to me about this SONA then is not what the president will say about projects but what the president will say on the legislative front. No one will disagree with me when I say this administration has so far taken policy for granted. The legislative agenda in the past year has been incoherent at best. The president ran under banner of anti-corruption and anti-poverty -- "kung walang corrupt, walang mahirap" -- but how the RH and divorce bills fit into this framework, I am left wondering. Should those be the priority? Population control to me remains a dubious anti-poverty strategy, and the empirical research on the topic confirms this, although I agree that the bills would do wonders for women's health and rights.

Whatever happened to the Freedom of Information Act? I cannot think of another policy that embodies "kung walang corrupt, walang mahirap" more. Recent research in India suggests that such a policy substitutes for bribery. No other law is politically easier to pass. For how can anyone reasonably argue against transparency? The costs would be marginal for releasing government data to the public.

There is also the pressing need to discuss the labor code. Recent data on the Philippine labor market, as I have blogged before, is horrifying. The unemployment rate is significantly higher for college educated filipinos than for uneducated ones in the domestic market-- 10% compared to 3% respectively. The returns are negative. It is of no wonder than that workers flee for foreign employment. But the situation in Saudi Arabia will make matters worse. No conditional cash transfer program or project can mend this problem. The country needs some change of policy.

What will be on the legislative agenda next year? Any thoughts and comments on what else could be done? I am all ears this Monday. 

Saturday, July 9, 2011

Development Bingo for the SONA

One of my fond memories from working at the Center for Global Development in DC is the annual State of the Union Bingos we held. The event would work like a usual bingo game would, except that instead of numbers we would have development words in the boxes of the bingo cards. So every time President Obama would mention something related to development in his speech, like "climate change," "aid," or "health" one of the boxes in the cards would get ticked. There would be prizes and of course a healthy supply of booze. We would hold it in one of the bars downtown. Friends of the center, folks who are interested in development, and staff, especially the young ones, would go.

I share only because some might want to plan a similar event for President Aquino's State of the Nation next week. It's a good way to get people to listen, to show that politics and public policy is fun -- as it really is. I hope someone could catch on to this.

Wednesday, July 6, 2011

When History was Made

The chart below shows a population-weighted history of the past two millennia. By this reckoning, over 28% of all the history made since the birth of Christ was made in the 20th century. Measured in years lived, the present century, which is only ten years old, is already "longer" than the whole of the 17th century. This century has made an even bigger contribution to economic history. Over 23% of all the goods and services made since 1AD were produced from 2001 to 2010, according to an updated version of Angus Maddison's figures.

I got this one from the Economist.

Sunday, July 3, 2011

A Word of Caution About the RH Bill

Some tables I pulled from the full report of the National Health and Demographics Survey of 2008. There are two small things I want to point out. First, a whopping 97.8% of women are familiar with modern contraceptive methods.

How does the current RH bill take this into account? This tells me that any proposed sexual education program must be mindful that people already know. What will be the value added? I hope current advocates are thinking hard about this. Knowledge of contraceptive methods is not the binding constraint. (Although perhaps knowledge of side effects is? I'm talking about the last table here.)

Second, considering that religious groups make the most noise against the RH Bill, I find it interesting that, in the end, religion plays such a tiny, tiny part of the decision of women not to use contraceptives.

I have in my computer the micro data for the Survey. If only I had more time, it would be fun to play around with it and see what more it can contribute to the debates because it is so rich with information. But I'll leave it to others at this point; I have exams to look after. To those interested, the data is freely downloadable at upon request.

Calling health economists?